Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

As an update to the earlier post – “Estate Tax Changes for 2010 and 2011” – I’ve recently seen some compelling arguments and interesting predictions about what may or may not happen with the Estate Tax for 2010.

Prognosticators

Things may be a little different from what I described in the earlier post. Some very smart guys (John Buckley, Chief Counsel for the House Ways and Means Committee, author and Estate Tax expert Jonathan Blattmachr, and Frank Berall, co-Chair of the Notre Dame Estate and Tax Planning Institute, among others) who make it their business to know everything about the Estate Tax from 1939 forward (when the current system was put in place), have been looking at the possibilities with regard to the projected 2010 repeal of the Estate Tax, and they have several predictions that could come into play.

Back to the Future

Instead of the supposed $1.3 million cutoff for basis step up, these guys figure that it’s every bit as likely that, IF the repeal goes through for 2010, that we’ll revert to the rules that were in effect with the 1976 Tax Reform Act. This means that the old “carryover basis” rule would go into effect – meaning that, when you inherit a piece of capital property, be it a stock or 80 acres of farmland, instead of receiving the step-up value as of the date of death of the decedent, you’d have to retain the original basis, or purchase price. So if granddad bought AT&T at $2 and now it’s worth a split-adjusted $300, you’d still have to use the carried-over basis of $2 when you sell the stock, and owe capital gains tax on the difference.
The reason this rule is expected (again, IF the repeal goes through for 2010) is because there is a significant amount of tax revenue that would be foregone, otherwise. It’s always about the Benjamins, right?
The good news is that those same guys don’t think the repeal will go through at all…

Back to the Present

Instead of the repeal, it is expected that the real outcome will be an extension of 2009’s limits: 45% maximum rate and $3.5 million exemption, with the same step-up basis rules in effect. The primary reason that this is the most likely outcome is because even with the carryover basis rule in effect, there would be an adverse impact on revenues, and with the “pay as you go” rule in place, any benefits must be paid for with cuts or increased revenues – however Estate Tax and Gift Tax provisions are exempt from paygo.
The extension is expected to be announced sometime in December, possibly just before Christmas, although it is possible that Congress could delay and pass the law sometime in 2010 retroactive to the first of the year – which has been deemed a constitutionally-allowed action.
However it works out, it’s going to be interesting to see what does happen with Estate Tax in 2010 and beyond. Stay tuned!

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About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.